China’s Growth Masks Unresolved Debt and Real-Estate Problems

Towers under construction in Guiyang in southwest China’s Guizhou Province. The property market, together with construction and home furnishings, now contributes to a third of the country’s overall economy. PHOTO: HU YAN/ZUMA PRESS

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By Lingling Wei
The Wall Street Journal

July 17, 2017 11:03 a.m. ET

BEIJING—China touted its buoyant economic expansion this year as evidence it can reduce debt without harming growth. But the outlook appears hazier when considering the property market’s outsize role in the economy, jittery consumers and signs that significant deleveraging hasn’t fully set in.

Beijing said domestic demand fueled 6.9% growth in the second quarter, a result that matched the first-quarter growth rate and beat economists’ forecasts. However, economists and analysts say the result has to be measured against a continued reliance on problematic sectors such as real estate and a lack of meaningful progress toward cutting the country’s debt.

Meanwhile, Chinese consumers aren’t spending as fast as their wages rise, suggesting many have become more financially strapped because of high property prices.

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On a mission to wean itself off debt-fueled growth, China credited domestic demand for a stronger-than-expected second quarter. Yet, lending stayed high and consumption rose at a slower pace than wages.

Armed with a more stable yuan and reduced capital outflows, Beijing has been able to tighten credit without causing market panic or affecting headline growth. That effort has forced banks and other financial institutions to cut back on borrowing from each other. But it hasn’t led to significant debt reduction in the economy.

In June, Chinese banks issued a higher-than-expected 1.54 trillion yuan in new loans, or roughly $227 billion, compared with 1.1 trillion yuan in May. More than a third of that amount went to home lending. Indeed, a resilient property market is the most important driver of China’s growth so far, according to economists including Messrs. Zhu and Hu.

The results mean that in a year that will see a twice-a-decade leadership transition, Beijing will have little problem reaching its full-year growth target of about 6.5%.

But Beijing has to continue to clamp down on credit to shift to a more sustainable growth model, leaders say. If growth slows in the coming months, that clampdown could become more difficult. “We shouldn’t be too optimistic about the economic picture in the second half of the year,” said Sheng Songcheng, a senior adviser at the People’s Bank of China.

Should growth weaken, Mr. Sheng said, the PBOC likely will gradually guide down the short-term interest rates used to price bonds and bank-to-bank loans and ease the liquidity constraints on the country’s financial system to help the economy. That would mark a shift in strategy since late last year, when the PBOC embarked on an untraditional tightening path by pushing up the short-term rates while leaving unchanged the benchmark rates.

Beijing faces a policy dilemma in its battle to tame the property market, which, together with construction and home furnishings, now contributes to a third of the overall economy. It doesn’t want home prices to soar for fear of destabilizing bubbles; on the other hand, it needs to prevent a property crash that could torpedo the economy.

Since late last year, a series of measures intended to curb home buying has helped slow the run-up in home prices in megacities such as Beijing, Shanghai and Shenzhen. Yet those measures have done little to deter potential buyers. Many of them have simply flocked to smaller cities.

Nationwide, property sales jumped 16% from a year earlier in the second quarter, primarily driven by the gains in medium-size and small cities. Property investment continued to accelerate in the first half. Still, there were signs that developers tempered investment toward the end of the period, expecting buyers to scale back amid purchasing restrictions.

In addition, the rising property prices are causing many consumers to tighten their purse strings. In the first six months, wages earned by urban residents increased 6.5%, on average, according to official data. By comparison, their consumption picked up at a slower pace of 5.1%. Property-related expenses represented the second-largest share of consumption after food and alcohol.

The gap indicates the toll that high home prices are taking on consumption as well as growing uncertainty among ordinary Chinese about the economy, economists and labor experts say.

One of them is Wang Jun, a 30-year-old car salesman in the southern metropolis of Guangzhou. Unwilling to be left out of the housing boom, Mr. Wang earlier this year bought a property with a mortgage payment that makes up about 75% of his monthly income. “I have to be frugal,” Mr. Wang said.